Oil Swings Go Beyond Fundamentals 14 comments
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Oil is up over $6 today as I write this. The daily swings have become much bigger in the last week or two than what is normal. This may signify something meaningful.
Forgetting what you think of the supply and demand aspect of oil for a moment, bigger swings than normal after a huge run that draws out many predictions of much higher prices very soon would seem to cry out for a meaningful drop before doing anything else. This sort of pattern is pretty reliable like when gold went above $1000 for a couple of days.
I buy into the long term supply-and-demand issues, I have been writing about them for as long as I have been writing, but whatever the exact reality of demand growth versus supply is, it is difficult to argue that the YTD move in crude is justified by the fundamentals alone.
W&T Offshore (WTI) could fall to $110 (not a prediction) and still be up a lot for the year.
If you want to talk about long term supply and demand I am right there with you, but such relatively violent moves should not be ignored as a short-term tell.
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This article has 14 comments:
But consider this thought: what if, up till now, supply has basically been sufficient to satisfy every mile that anyone wanted to drive. I.e. there's extra capacity that could be ramped up. In that world, prices are a function of costs, plus some decent profit to suppliers. If suppliers want more profit, they have to organize a cartel, i.e. OPEC.
Now imagine that we have just crossed the line to a world where there are a few more miles people want to drive than there is gas to power them. Now, the prices have to rise to the point where some people who want to drive some miles, decide not to. I.e. prices are determined by value to the customer.
Cost + profit is a totally different number than utility value to the customer. Flipping from one to the other could involve a small amount of oil but a huge swing in prices. Like we're seen.
Analogy: if 10 guys come in from the desert dying of thirst and there's a whole costco full of water there, they are going to get their water for a buck a bottle like anyone else. But if 10 guys come in from the desert and there are only 9 bottles of water for sale, whoever sells those bottles is gonna get their whole wallets and credit cards because someone is going thirsty.
Read the IEA report. People are going thirsty. The big question to me is, will new production get us back into the lovely world we have been so used to for all these years? Or are we in a world where every extra gallon burned in BRIC has to be balanced by a gallon less burned in US/Europe?
Course, maybe it's just a bubble /shrug
Simultaneously Bernanke and the Fed seem not to fully appreciate the impact of keeping interest rates artificially low. 15 percent of the increase in oil prices can be tied directly to the weakening of the dollar relative to the Euro in the last year. So that $138 barrel would cost only $120 if the dollar were stronger and that doesn't even take into account the speculators that are trying to protect themselves against the weak dollar by buying oil.
Finally, lets not forget that the Riyal is tied to the Dollar, the weak dollar has made it more expensive to live in Saudi Arabia, not giving them any incentive to increase oil production and risk further weakening the Dollar.
Errr, why on earth would oil rise on this news.
Looks like another bubble to me. My prayers have been answered.
She told me tomorrow marks the beginning of the end of the great oil boom this decade.
Oil will go down to less than hundred dollars a barrel in 6 months.
"Unless, somebody in the Government rationally and logically looks at these issues, this trend is going to stay bullish."
The Senate Commerce Committee heard all about it last Tuesday 3-Jun (video may still be on C-Span's web site). A couple days ago a Republican filibuster prevented debate on a bill that would have returned to the Commodity Futures Trading Commission the power to regulate oil market, which was removed from it by Phil Gramm (creating the "Enron Loophole") in 2001.
Those represented in the Senate by Republicans need to write their reps a letter or send an email thanking them for their nice high gas prices.